Legendary VC investor Bill Gurley wants to ban the order-flow practice at the heart of the Robinhood saga – and one platform is already abandoning it

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  • VC investor Bill Gurley wants the brokerage practice of payment for order flows banned.
  • “If the SEC/government wants to ‘fix the plumbing’ the number one thing they should do is ban Payment for Order Flow,” Gurley tweeted.
  • Free trading app Public.com is doing just that, according to a Monday blog post from the company.
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The epic short-squeeze in shares of GameStop last week put a spotlight on the common practice of payment for order flow by brokerage firms after Robinhood restricted trading in a handful of volatile stocks.

Payment for order flow is a practice in which brokerage firms are compensated to route their customers trading orders to certain market makers to execute the trades rather than directly to an exchange, creating a potential conflict of interest between the brokerage and the customer.

The PFOF practice has enabled $0 commission trading, jump started by Robinhood’s launch in 2015, which was groundbreaking at the time when most investors had to pay upwards of $10 for every buy or sell order.

Now, nearly every brokerage firm offers $0 commission trading.

But the PFOF practice is facing backlash from many, including venture capital investor Bill Gurley, who tweeted on Sunday, “If the SEC/government wants to ‘fix the plumbing’ the number one thing they should di is ban Payment for Order Flow.”

Gurley pointed out that the practice “smells bad” and is already outlawed in the UK and Canada. 

Read more: Buy these 26 heavily shorted stocks as retail traders trigger wild rallies in Wall Street’s least-liked names, Wells Fargo says

But Robinhood makes a bulk of its money from the PFOF practice, having generated upwards of $100 million in revenue in the first quarter of 2020 from a number of market makers, including Citadel Securities, according to a SEC filing.

Now, a free-trading brokerage firm is bucking the PFOF practice and shifting its business model to tipping.

In a blog post on Monday, Public.com said it would end the practice of selling its customers’ order flow to market makers, and would instead route them directly to exchanges like the Nasdaq and New York Stock Exchange.

“To align our incentives with those of our members, we will stop participating in the practice of PFOF and instead introduce a tipping feature on trades,” Public said, adding that it would essentially move a big conflict of interest from its business model. 

“Trades will remain commission-free and tipping is entirely optional,” Public added.

The firm notified its clearing firm, APEX, on January 30 of its intent to be taken off the “PFOF rails,” according to the blog post. Now all trade orders at the brokerage firm will be directly routed to exchanges for execution.

“Direct routing to the exchanges is more expensive, and therefore we’re turning what used to be a revenue stream (PFOF) into a cost center and we’re optimistic that the difference will be offset by the optional tipping feature,” Public said. 

The transition away from PFOF and towards tipping could take a few weeks, the company said. 

“Transparency is a core pillar of building trust, and we think it’s important that we live up to our name,” Public concluded. 

Read more: Jefferies says these 20 heavily shorted and lightly traded stocks could see big jumps in the event of a GameStop-like squeeze

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